Currency Exchange Rate Bias

This research examines biases in judgments about currency exchange rates and presents two types of biases that are caused by ignorance of the nonlinearity between the exchange rate and the amount of base currency. First, the average exchange rate of multiple exchange transactions is overestimated. Second, the impact of a change in one currency’s value on the counterpart currency is underestimated, when the change is a decrease but overestimated when the change is an increase. This research also demonstrates that these biases lead individuals to make suboptimal decisions, causing economic losses. Furthermore, this research examines the role of how exchange rate information is presented in reducing bias. Specifically, overestimation of the average exchange rate can be reduced by presenting the exchange rate in terms of the base currency instead of the quote currency. Bias in the judgment of the impact of exchange rate changes diminishes, when the focal currency to be judged is presented as the quote currency of the exchange rate. Last, this research shows that biases in currency exchange rates differ from biases in other types of ratios (e.g., velocity or fuel efficiency) because of the difference in the degree of fungibility.